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Rupee caps best first quarter since 1975 amid $12 billion inflow

LiveMint logoLiveMint 31-03-2017 Kartik Goyal

Mumbai: Foreign investors gorging on Indian stocks and bonds propelled the rupee to its best first-quarter performance since 1975.

The currency, Asia’s best performer this month, has rallied 4.7% since 31 December as a thumping win for Prime Minister Narendra Modi’s party in state elections boosted bets for continuation of his government’s reform agenda, luring overseas funds. The Reserve Bank of India (RBI)’s intervention in currency markets may intensify if inflows rise, according to Standard Chartered Plc.

“Change in sentiment toward India after the state elections and high real rates have attracted large portfolio flows into equity and debt,” said Gopikrishnan MS, Mumbai-based head of foreign exchange, rates and credit for South Asia at Standard Chartered. “Market action indicates that the RBI has been intervening and we think they could continue to do so if the flows continue.”

Foreign holdings of rupee-denominated government and corporate bonds climbed by Rs359.4 billion ($5.5 billion) this quarter, with Rs272 billion coming in March alone, the most for any month in Bloomberg-compiled National Securities Depository Ltd’s data going back to mid-2011.

ALSO READ: Rupee closes stronger against US dollar

Overseas funds have poured $6.1 billion into Indian stocks since the year-end, of which $4.5 billion has come this month. The Federal Reserve’s dovish tone on future rate hikes further burnished the allure of Indian assets and contributed to a weaker dollar.

The rupee climbed 0.1% to close at 64.85 per dollar in Mumbai on Friday, taking its gain this month to 2.8%. The three-month advance is the biggest for any quarter since the period ended September 2012. The S&P BSE Sensex of shares rallied 11.2% to complete its best quarter since the period ended June 2014.

“Unlike in the past, the RBI’s intervention in the currency market has not been aggressive enough this time around,” HDFC Bank Ltd economists led by Abheek Barua wrote in a report received by email this week. “The fair value of rupee has changed from around 67 to 65 currently.”

The currency “could trade higher in the 65.50-66.00 range by May or so,” Gopikrishnan of Standard Chartered said.

Yields on local sovereign bonds, among the highest in Asia, are another reason foreign investors are flocking to India. The 10-year yield jumped 46 basis points last month, the most since July 2013, after policy makers unexpectedly signalled an end to the monetary easing cycle. It slipped 19 basis points this month, helped by the inflows.

At 6.68% on Friday, India’s 10-year government notes pay 427 basis points more than similar-maturity US treasuries. Bloomberg

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